Nigeria reworks its debt profile in the years since 2006 relief

Eight years after securing $18bn in debt relief from the Paris Club and multilateral creditors, Nigeria has firmly repositioned itself on international debt markets. Having staged its second eurobond auction in as many years in 2013, with plans to return regularly to the dollar-denominated offshore bond markets, Nigeria is rebalancing its debt profile by paying down part of its local-currency exposure. While the rebasing of its GDP gives the country more room for additional issuances, it will need to sustain upward momentum in its sovereign credit re-ratings as it works to control subnational debt issuance by state governments.

Debt Profile

Following Nigeria’s paying off of $12bn in debt and the cancellation of $18bn by the Paris Club and multilateral organisations in 2006, the country’s total debt-to-GDP ratio fell sharply from 66.13% in 2002 to 12.39% in 2006 and 11.67% in 2007, according to Debt Management Office (DMO) figures. This has gradually rebounded to 18.4% in 2012 and 19.1% in 2013, but subsequently fell to 13% as of the second quarter of 2014, according to the DMO. Within this, foreign-currency debt has remained at a low 2.9% of GDP, according to International Monetary Fund (IMF) figures. Following the rebasing exercise, which increased GDP by 89% when unveiled in April 2014, Nigeria’s aggregate debt burden fell to 12.3% of GDP. At the same time, the external debt-to-GDP ratio, which measures the indebtedness of the country to the world and its ability to repay, stands at 1.9% of GDP. The total external debt composition is at $9.3bn, or some 14% of total public debt, while domestic debt of $57.6bn comprises the remaining 86% of total public debt.

Successive governments have successfully lengthened the tenor of obligations and fostered a liquid yieldcurve in local-currency bonds extending up to 20 years. By 2013 only one-quarter of total debt was in short-term maturities of less than two years, according to the IMF, which expects Nigeria’s debt burden as a share of GDP to fall to single digits in the decade after 2018 if authorities sustain their fiscal consolidation drive. However, given significant revenue shortfalls in recent years, combined with a growing omissions and error line in the balance of payments, this may be optimistic.

Indeed, credit rating agency Fitch noted in an April 2014 update that Nigeria’s current account surplus of 4.1% of GDP may be overstated given the large omissions line, while foreign direct investment accounted for only around 1% of GDP.

Rebalancing Offshore

A post-Paris Club push for a liquid yield curve in the local-currency fixed-income market to entice subnationals and corporates to issue bonds saw some success, but recent years have prompted a more wary approach.

“Nigeria does not have a debt problem overall, but Nigeria has to watch its domestic debt,” the coordinating minister for the economy and minister of finance, Ngozi Okonjo-Iweala, said at a Ministry of Finance (MoF) budget conference in March 2014.

In February 2013 the MoF started retiring maturing domestic bonds with an initial N75bn ($457.5m). In the 2014 budget the government increased domestic debt servicing to N663. (montechamber.com) 61bn ($4.05bn), primarily to retire bonds – a 24.2% increase over the N534.38bn ($3.26bn) in 2013 – out of a total debt-servicing budget of N712bn ($4.34bn). While successive governments have proven capable of developing a yield curve and local-currency asset class in which domestic institutional investors like pension funds can place funds over the long term, the large pool of federal government debt has also proven a distraction for many banks, which have invested cheap deposits in high-yielding government assets rather than lending to the real economy – a challenge common across West Africa.

Nigeria’s ability to gradually rebalance borrowing towards offshore sources is underpinned by the warm international reception to such issues since it first reentered the eurobond market in 2011, as sub-Saharan Africa’s fifth sovereign issuer. In January 2011 the country issued $500m in 10-year bonds at a coupon of 6.75%, at lower rates than Gabon or Senegal, in a deal underwritten by Citibank and Deutsche Bank. Two years later, in July 2013, a deal underwritten by the same two banks saw Nigeria issue another $500m in 10-year bonds with a coupon of 6.625% and an additional $500m in five-year bonds with a coupon of 5.375%.

The tighter pricing was even more remarkable given the timing: while Nigeria had been upgraded by all major rating agencies in the two intervening years, it was the first African borrower to return to market following the US Federal Reserve’s announcement of quantitative easing tapering in May 2013 and the subsequent spike in emerging market yields. The maiden 2011 issue was two-and-a-half times oversubscribed, while the 2013 issue was over four times oversubscribed. Nigeria’s traditional investor base was the primary purchaser of the debt, with US-based investors accounting for 73% of the issue alongside the UK’s 16%. These two successive issues have supported Nigerian banks as they raise greater dollar-liquidity through Tier-2 bond issues (see Banking chapter).

Okonjo-Iweala, responsible for the original debt relief in 2006, announced intentions to return to the offshore market regularly, every year or two, to build on the fledgling yield curve of debt maturing in 2018, 2021 and 2023 by issuing longer-tenor notes of up to 15 to 20 years. The sovereign is also planning two new foreign-currency issues – one of which will be a global depository note programme of up to $400m through Citibank, authorised in 2013.

Longer in the making, the country’s first bond to be marketed exclusively to its offshore diaspora was due to be floated by the end of 2014, underwritten by Stanbic IBTC and Goldman Sachs, with the aim of raising up to $300m. However, as of March 2015 the launch was still pending.

State Liabilities

The MoF’s DMO is working to rebalance Nigeria’s debt mix, with the subnational debt burden having grown significantly in recent years. One corollary of a liquid local-currency sovereign debt market has been the growing pipeline of bond issuance by Nigeria’s states. While the total domestic bond market reached a capitalisation of N5.85trn ($35.69bn) by end-2013, the 35 bonds issued by 18 states accounted for N1.47trn ($8.97bn), according to DMO figures, a 19.34% year-on-year increase. Despite formal DMO approval being required for all state-issued bonds, as they benefit from a de facto sovereign guarantee, states with internally generated revenue in excess of 35% of total revenue have been able to raise more funds. As such, Lagos State has proven to be the first, largest and most frequent issuer, raising a total of N187bn ($1.14bn) in debt, including a landmark N87.5bn ($533.75m) in November 2013 – the largest single state bond. The majority of state bonds are amortised over their lifespan and backed by irrevocable standing payment orders that require monthly deductions from a state’s federal allocations to repay the bond.

Only five bonds, including those from Lagos, Edo and Kwara States, are bullet bonds, whereby the principle and coupon are paid in full upon maturity. While up to another 10 state bond issues were planned for 2014, according to estimates from Standard Chartered Securities, the DMO appears to be capping new issues at approximately N5bn ($30.5m) in the run-up to the March 2015 elections.

Rebalancing Debt

As the MoF strives to rebalance its debt mix towards cheaper, longer-tenor offshore bonds and contain rising state debt levels, it will increasingly face a balancing act. Downward pressure on the currency, which finally led to the devaluation of the naira in November 2014, could limit space for debt servicing going forward, even if the nominal value of external debt remains highly manageable and currency exposure is partly hedged.

The MoF will also have to reassure the medium-term concerns of international credit rating agencies, even if the recent trend has been towards upgrades. Fitch and Moody’s maintained their respective “BB-” and “Ba3” ratings with stable outlooks as of November 2014. However, having placed Nigeria’s “BB-” rating on a negative outlook in March 2014, S&P downgraded the rating to “B+” a year later. The company said it based the country’s downgrade on the decline in oil prices in the last seven months as well as a tense political situation around the elections.

While Nigeria retains a comfortable margin in expanding its foreign-currency liabilities in the coming years, the timing of new issues will become increasingly important amidst a more discriminating global market. As Western economies’ quantitative easing tapers, the space for emerging and frontier market issuers will tighten considerably, though Nigeria’s successful July 2013 issue reflects the ability of its economic management team.

Meanwhile, the MoF will need to sustain some level of local-currency issuance to address the needs of domestic institutional investors starved for long-term assets to meet liabilities such as pensions. While discipline is required, particularly at the subnational level, the government will also need to strike a careful balance in its debt management in the years ahead.